Friday, August 31, 2007

Murrey Math is a trading system for all equities. This includes stocks, bonds, futures (index, commodities, and currencies), and options. The main assumption in Murrey Math is that all markets behave in the same manner (i.e. all markets are traded by a mob and hence have similar characteristics.). The Murrey Math trading system is primarily based upon the observations made by W.D. Gann in the first half of the 20th century. While Gann was purported to be a brilliant trader in any market his techniques have been regarded as complex and difficult to implement. The great contribution of Murrey Math (T. H. Murrey) was the creation of a system of geometry that can be used to describe market price movements in time. This geometry facilitates the use of Gann's trading techniques.

The Murrey Math trading system is composed of two main components; the geometry used to gauge the price movements of a given market and a set of rules that are based upon Gann and Japanese candlestick formations. The Murrey Math system is not a crystal ball, but when implemented properly, it can have predictive capabilities. Because the Murrey Math rules are tied to the Murrey Math geometry, a trader can expect certain pre-defined behaviours in price movement. By recognizing these behaviours, a trader has greatly improved odds of being on the correct side of a trade. The overriding principle of the Murrey Math trading system is to recognize the trend of a market, trade with the trend, and exit the trade quickly with a profit (since trends are fleeting). In short, "No one ever went broke taking a profit".

The Murrey Math geometry mentioned above is "elegant in its simplicity". Murrey describes it by saying, "This is a perfect mathematical fractal trading system". An understanding of the concept of a fractal is important in understanding the foundation of Murrey Math. For readers interested in knowing more about fractals I would recommend the first 100 pages of the book,"The Science of Fractal Images" edited by Heinz-Otto Peitgen and Dietmar Saupe. The book was published by Springer-Verlag, copyright 1988. An in depth understanding of fractals requires more than "8'th grade math", but an in depth understanding is not necessary (just looking at the diagrams can be useful).

The size (scale) of basic geometric shapes are characterized by one or two parameters. The scale of a circle is specified by its diameter, the scale of a square is given by the length of one of its sides, and the scale of a triangle is specified by the length of its three sides. In contrast, a fractal is a self similar shape that is independent of scale or scaling. Fractals are often constructed by repeating a process recursively over and over.

The next question, of course is, "What does a fractal have to do with trading in equity markets?" Imagine if someone presented you with a collection of price-time charts of many different equities and indices from many different markets. Each of these charts has been drawn using different time scales. Some are intraday, some are daily, and some are weekly. None of these charts, however, is labelled. Without labels, could you or anyone else distinguish a daily chart of the Dow from a weekly chart of IBM, or from an intraday chart of wheat prices. Not very likely. All of these charts, while not identical, appear to have the same general appearance. Within a given time period the price moves some amount, then reverses direction and retraces some of its prior movement. So, no matter what price-time scales we use for our charts they all look pretty much the same (just like a fractal). The "sameness" of these various charts can be formally characterized mathematically (but this requires more that 8th grade math and is left as an exercise to the interested reader).

Gann was a proponent of "the squaring of price and time", and the use of trend lines and various geometric angles to study price-time behavior.Gann also divided price action into eighths. Gann then assigned certain importance to markets moving along trendlines of some given angle. Gann also assigned importance to price retracements that were some multiple of one eighth of some prior price movement. For example, Gann referred to movement along the 45 degree line on a price-time chart as being significant. He also assigned great significance to 50% retracements in the price of a commodity. The question is, "A 45 degree angle measured relative to what?" "A 50% retracement relative to what prior price?"

These angle or retracement measurements are made relative to Gann's square of price and time. Gann's square acted as a coordinate system or reference frame from which price movement could be measured. The problem is that as the price of a commodity changes in time, so must the reference frame we are using to gauge it. How should the square of price and time (the reference frame) be changed so that angles and retracements are measured consistently? This question is one of the key frustrations in trying to implement Gann's methods. One could argue that Gann recognized the fractal nature of market prices changing in time. Gann's squaring of price and time, however, did not provide an objective way of quantifying these market price movements.

If one could construct a consistent reference frame that allowed price movement to be measured objectively at all price-time scales, then one could implement Gann's methods more effectively. This is exactly what Murrey Math has accomplished.

Here below is a short description extracted from a document published a few years ago by Tim Kruzel , which since seems to have disappeared from the face of the WWW.

· Upper Magenta Dotted Line - Ultimate ResistanceThese lines are the hardest to penetrate on the way up, and provide the greatest resistance. (Prices sometimes never make it through these lines).

· Upper Grey Line - Weak, Stall and Reverse (not displayed – halfway line)This line is weak. If prices however run up too far too fast, and if they stall at this line they will reverse down fast. If prices do not stall at this line they will move up to the Upper Magenta Dotted line.

· Upper White Dots - Pivot, Reverse (displayed when prices come close)This line is second only to the Central Yellow dotted line in its ability to force prices to reverse. This is true whether prices are moving up or down.

· Upper Trading Range Level (not displayed – halfway line)The prices of all entities will spend 40% of the time moving between the Upper Green line and Lower Green line. If prices move above the Upper Green line and stay above it for 10 to 12 bars, the entity is said to be selling at a premium to what one wants to pay for it and prices will tend to stay above this line in the "premium area". If, however, prices fall below the Upper Green line then they will tend to fall further looking for support at a lower level.

· Central Yellow Dots - Major Support/Resistance Pivot PointThis line provides the greatest amount of support and resistance. This line has the greatest support when prices are above it and the greatest resistance when prices are below it. This price level is the best level to sell and buy against.

· Lower Trading Range Level (not displayed – halfway line)If prices are below this line and moving upwards, this line is difficult to penetrate. If prices penetrate above this line and stay above this line for 10 to 12 bars then prices will stay above this line and spend 40% of the time moving between this line and the Upper Green line.

· Lower White Dots - Pivot, Reverse (displayed when prices come close)This line is second only to the Central Blue line in its ability to force prices to reverse. This is true whether prices are moving up or down.

· Lower Grey Line - Weak, Stall and Reverse (not displayed – halfway line)This line is weak. If prices however run down too far too fast, and if they stall at this line they will reverse up fast. If prices do not stall at this line they will move down to the Lower Cyan Dotted line.

· Lower Cyan Dotted Line - Ultimate SupportThese lines are the hardest to penetrate on the way down and provide the greatest support. (Prices sometimes never make it through these lines).

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Welcome !

And enjoy your visit to this little "Market Snapshot" blog.

The market report blog has now moved toForeTrade while this one will (time permitting) focus on actual chart commentaries on TF and ES eminis, as well as EURUSD to show how accurate and yet simple our proprietary method is. The reason for this change is that the Toolset itself is no longer for sale itself, simply because the sales effort and training/support activities were too time consuming. I now provide market analysis exclusively to fund managers until the technology is finally sold to a fund or financial institution. The blogs and Twitter will then be closed or turned private. Anyway, enjoy while it's there...

A closer look:Behind these market snapshots lies an advanced TradeStation toolset including a set of C++ DLLs and API to access various advanced realtime calculations stored in the DLL to be used either within TS or with custom VC++ programs. While seemingly a little complex at first, the technique is actually relatively easy to grasp. In fact, since most humans can only memorize 3 to 5 (sometimes up to 7) pieces of information at any one time, and the technique being discretionary, it was essential to keep it as simple as possible.

What are those snapshots made of ?In a nutshell, all reports are based on a minimum of 1 symbol in 3 Time Frames: 60mins, daily and weekly, themselves using more or less the same indicator set: self-adaptive swing indicator, MTFS (formerly AdStoK) and self-adaptive Entropy and a few visual aids (swing direction, support/resistance levels and paintbars). "Self-adaptive" is the key word here. There is virtually no parameter to tune, and it can be used as is, for virtually any market symbol. Each chart provides a visibility 3 to 5 bars ahead, so actual trading should obviously be complemented by a sound money management technique.

A common question : Why isn't there a user documentation then? Hmmm... Who ever reads manuals...? Well, I might provide one eventually but at the same time I might not... The reason is that it is more important to absorb the method over a period of time and make it one's own, i.e. then adapt it to one's own trading profile.For the keen developer, a detailed API documentation for this set of advanced TradeStation Analysis Techniques will be released shortly.For the time being a separate technical blog has been launched for those of you interested in learning a little more about what's under the bonnet.For more info: voisin DOT bruno AT gmail DOT comRSS Feed: http://feeds.feedburner.com/blogspot/CImq